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Bulgarian Property Market Potential 2009

The media hype about the global financial crisis has had everyone panicking about current investments particularly those abroad. The questions remains as to whether it is still a good time to take out a mortgage on a Bulgarian property. Alistair Riddle, Credit Manager of Piraeus Bank London enlightens us on how the global credit crisis has affected the mortgage market and what the outlook for the future is.

The international mortgage and the global financial crisis

On the basis that buying abroad has mainly been driven by investors or buyers of holiday homes, it was inevitable that we would witness a slow down in demand of overseas property at a time when the UK consumer feels very nervous about the declining value of their residential property and their job security.  At the same time and for the same reasons as well as the scarcity or high cost of interbank money, banks are less willing to lend on what after all constitutes a more speculative purchase than ever.

Everyone acknowledges that the biggest reason for the uncertainty surrounding the recovery of the economy is consumer psychology.  With Euro interest rates as low as they are, if one could release equity on a Bulgarian property, it might make good sense in terms of alleviating some of the stress and insecurity, to repay high rate debts in the UK such as credit cards and store cards. The reality though is that while banks are still not lending as cheaply and easily to each other as they used to and are consequently more selective and careful as to the loan amounts and quality of risk, they do not want to encourage people to get into more debt and so are not offering equity release mortgages.  As for the purchase of Bulgarian property, as long as someone has relative employment certainty, long term horizon and comfortable affordability, the recent price adjustments make Bulgaria a good destination.

The current mortgage situation for buying in Bulgaria

The mortgage situation for people that want to buy in Bulgaria is much the same as for those who want to purchase property practically anywhere – banks have refocused on the core elements of mortgage lending – sensible levels of gearing, identifiable affordability (i.e. not relying on income streams from an as-yet unproven rental source) and the value and location of the property itself. Whilst some banks have never veered from this tried, trusted and ultimately successful strategy – both for the bank and for the customer, some local banks in an effort to gain market share at a time that domestic demand was also booming, appeared to offer mortgages that were not wholly dissimilar to the sub-prime mortgages in the US – and with similar outcomes.

The effect of this is that the more adventurous or unrealistic lending policies have been withdrawn and this is seen by the general consumer as a significant tightening of the market. The fact is that some good and fair mortgage products which were overshadowed by the very aggressive terms of the off-plan and self-certified type mortgages were and still are there. Only now, they are available even more cautiously and where all factors supporting prudent lending are there: customer affordability, sufficient buyer contribution, prudently carried out valuation.

Buying off plan

Those who signed agreements to purchase off-plan more than a few months ago may find that the valuation of their property is less than the agreed purchase price. This is not specific to Bulgaria and happens in all declining markets. That being said, there do remain good developments which have seen price rises due to their exclusivity, their facilities and their overall standard. When the valuation is less than the agreed purchase price, the customer must be aware that the bank will use the valuation as its guide and will offer funds based on this. Whilst there remain mortgages for Off-Plan developments in Bulgaria, banks are typically looking at financing the better resorts only in tourist areas or those where there is an identifiable domestic market – such as the larger cities.

Older property

Older property is easier to value and to ascertain long-term values for, given the very fact that it has history, and is therefore easier for banks to become comfortable with – this being the same as one can currently see in the UK. Older property also suffers less from extremes in value fluctuations which is arguably preferred by banks at the present time where realistically default rates may increase as home economies suffer. However, beyond that, the issue remains the same as for off-plan purchases in that the Bank will look carefully at the repayment of the property.

Land purchases

Land is a purely speculative purchase and will be seen as such by many banks, unless the land is being purchased with the sole intention of purchasing a single residential dwelling for the customer. Essentially, in a declining global economy, the potential for re-sale reduces in a default position and therefore banks will heavily discount the value to ascertain how much they will lend. With development finance increasingly hard to get as banks find it difficult to ascertain the end values of any development much more than one property, any prospective purchaser must be prepared to effectively land-bank the asset until market conditions are more favourable, which means the customer must have sufficient liquid funds available to support this.


The profile of current mortgage takers in Bulgaria

A few years ago the typical investor would have been a bit less risk averse - literally gambling on quick price rises and hoping to get out quickly. This has changed as these most speculative of investors have moved their attention to newer markets as whilst the Bulgarian market remains relatively cheap, it is seen by many as a mature market and as such it is deterring speculators who are focusing in markets less explored.
The typical current investor realises that as with the UK market, not every piece of property is literally worth its weight in gold. They are careful to choose a property in a good location or development. They also ensure that they can afford to maintain the mortgage without rental income if needs be for a short while and they consider the property as a longer-term investment - essentially purchasing the property because they would actually like to use it every so often and not just literally using it as an alternative to a high interest rate internet deposit account where the product is something intangible never actually seen or enjoyed.

For more information please contact Piraeus Bank London on  00 44 (0) 845 603 6538 or visit www.piraeusbank.co.uk.